Episode 32: 1099-K, Part 1: Understanding the Rules and the Reporting Gap

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Welcome to this week's Information Return Intelligence powered by IOFM. My name is Jason Dinison. Today we're going to talk about Form 1099K. This is actually the start of a three-part series on 1099K. We're heading in now to mid-June as you're listening to this live. And these summer months are a good time to have kind of long form series like this. Now, if anything breaks in the meantime in the 1099 world, such as that draft of the W9 gets released for real, we'll break up this series and have a different episode. But this will be a three-part series about 1099K. So let's start with what it is. You may have heard of this form. I don't know how many of you issue it. Some of you might, but there's been a lot of confusion just in general because the reporting thresholds have moved around over the last four years, and then got reset to what they were before in the Big Beautiful Bill last summer. So what is the 1099K? It's a form issued in situations involving payment card transactions and third-party settlement organizations. That's really easy for me to say. What does that mean? So on payment card transactions, think of a business that accepts credit cards. Maybe even your business accepts credit cards. Your business almost certainly has a merchant processor in the background that actually handles that transaction. The merchant processor sends a 1099K to you at the end of the year, showing all of the money taken in by credit cards and debit cards during the year. Then you have third-party settlement organizations. Those are places like Venmo and PayPal or platforms like Etsy. These are places that facilitate transactions, they hold the money in the middle. That's how I like to describe it. And the recipient has to log into their account at that platform to get the money. Now, what about bill pay services? Your typical bill pay service is not a third-party settlement organization. Most bill pay services are simply facilitating an ACH transaction to your vendor. That is not 1099K. Now you have to be careful because bill.com at some point in the last year or so rolled out a different type of payment option that sometimes might fall under the heading of a third-party settlement organization. But generally, your typical bill pay service does not fall under the heading of a third-party settlement organization. Now for the reporting thresholds for payment card transactions, those merchant processors, there is no threshold. One transaction for one cent, they will issue a 1099K. Third-party settlement organizations will issue a 1099K only if the recipient hits both of these thresholds. More than 200 transactions processed and more than $20,000 received during the year. Now, before we go further, and to help you understand 1099K and some of the controversies that surround it, we need to talk about 1099 NEC and 1099 miscellaneous. If you pay a merchant using a credit card or debit card, you don't issue a 1099. Businesses that pay contract labor using a third-party settlement organization like PayPal or Venmo don't issue a 1099 any C. Now who issues the 1099K? Well it's whoever the behind the scenes processor is. If it's a credit card transaction, it's whoever the merchant processor is, they'll issue a 1099K. If it's a third-party settlement organization, then that platform issues the 1099K if the thresholds are crossed. Here's where it gets tricky though. Payments made through a third-party settlement organization are more complicated. So you as the payer have to determine is the payment for goods and services, meaning really contract labor, and then did you mark goods and services when making the payment, or on some apps or platforms, it's are you paying through your vendor's business profile? If the answer is yes, it's for goods and services, and you mark that, or you're paying through the business profile of the recipient, then you don't issue a 1099 NEC. The third-party settlement organization has the reporting requirement on a 1099K. Now we'll talk about why this is important next, but first let's hear a word from our sponsor, IOFM. Financial operations professionals, whatever you call yourself or whatever your organization calls you, accounts payable, procurement, procurement to pay, accounts receivable, credit and collections, order to cash, whatever it's called. Or maybe it's all of the above. You're facing mounting pressure to improve performance. All of this stuff changes all the time, not just with 1099s, but with so many other things that you deal with. Plus, you have threats of fraud on the rise. You have all these challenges, but not a lot of great places you can turn for reliable, independent, and comprehensive help. That's where IOFM comes into play. Join over 10,000 of your peers and become an IOFM member today. Check them out at IOFM.com. And now back to the show. So with this 1099K stuff that we've been talking about, why is it important? Well, if a transaction might be reported on a 1099K, you don't issue a 1099 NEC. And that is where some of the oddities and controversies can come into play with this. So the Affordable Care Act created 1099K reporting. And for third-party settlement organizations, that's where that 200 transaction and $20,000 received threshold came from. The American Rescue Plan in 2021, also known as the Third COVID stimulus bill, called for a change in that third party settlement organization to $600 with no transaction threshold. This caused a whole bunch of uproar. And so the IRS never actually implemented that threshold. They kept kicking the can down the road and without reading all the different thresholds that they kicked it to you. Check out our article on Substack where we list what the transaction thresholds were over the few years after the American Rescue Plan as the IRS was trying to figure out how to deal with what was going to be a huge influx of forms that their systems may not have been ready to handle. But just know that $600 threshold for $1099K never actually got implemented. Now here's the problem with the threshold at 200 transactions and $20,000. Let's say you have a contractor with 25 business clients who each pay him $10,000 for the year. So he takes in $250,000. If payment is made through check or an ACH transaction, then the paying businesses have to send him a $1099 NEC. And the big bad IRS knows all about his $250,000 of income. But if payment is through a third-party settlement organization and the payers mark goods and services while making the payment, they don't have to issue a $1099 NEC. Instead, the 1099K rules apply. The thresholds are more than $20,000 received and more than 200 transactions. Well, he had way more than $20,000. He had $250,000 received. But that was just 25 clients, nowhere near 200. So Venmo or whatever third-party settlement organization, they won't issue him a 1099K, and the paying businesses won't issue him a 1099 NEC. Now the contractor should report all of his income honestly, but in the real world, there's a lot of people who wrongly assume if there's no reporting form, they don't need to report it at all. That's wrong, but that's what a lot of people believe. Now, we'll talk in part two about other perspectives on this. I talk a lot about 1099s. I've been doing this for 14 years. And when I talk about this 1099k subject, I always reference the contractor with his 250,000 of income with no reporting threshold being issued. And I am right in bringing that up, and some of my criticism of tax professionals who really fanned a lot of flames of hysteria around the change in this 1099K threshold. I criticize that sometimes too. And I am right on that. However, there are other perspectives to consider on why the proposed lowering of the threshold might not have been good. And what the big beautiful bill did is it reset the reporting threshold back to 200 transactions and $20,000. And that might actually have been a good thing. We look at other perspectives on this in part two, which will be next time on Information Return Intelligence powered by IOFM. Until next week, so long, Dinoson Media Ventures.